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Tech Stocks : Software
In Software, Anything Better Than Awful Looks Pretty Good
By Joe Bousquin
Senior Writer
7/9/01 9:13 AM ET
Usually, when you miss your bottom line by 400% or so, it's bad.
Which is why it was so surprising to see shares of webMethods (WEBM:Nasdaq - news - commentary) rise 18% after the company said it will lose 9 cents to 10 cents per share instead of the 2 cents Wall Street was expecting.
webMethods was up $2.81, or 17.8%, to $18.57 in Friday trading. Nor was it the only contrarian uplift for a software stock last week. Procurement software company Ariba (ARBA:Nasdaq - news - commentary), surrounded by the shrinking share prices of rivals, managed to finish the week nearly 6% higher than where it started.
But don't look there for signs of the broader salvation of software. This doesn't signal an impending uptick for the sector. It was just relief that things were not even worse for a pair of battered software companies.
webMethods: Bad News Is Good News
Investors' expectations for webMethods were far lower than published estimates -- which is why things got better once the company broke the news.
"Don't you love it?" says David Hilal, analyst at Friedman Billings Ramsey, who rates the stock a buy. "They missed, but it wasn't as bad as it could have been." (His firm has done underwriting for webMethods.)
After dropping 26.3% over five trading sessions, webMethods' shares also had an oversold environment on their side.
"The stock had declined substantially in the last few trading sessions, and people had feared the worst," says Ken Kiarash, an analyst with Buckingham Research Group, who has a neutral rating on the stock. "This wasn't quite that. So we got a relief rally." (His firm hasn't done underwriting for the company.)
And some help from short-sellers.
"If you look at how the stock has traded, a month ago it was at $30," says FBR's Hilal. "So I think there were people who shorted it from $30 to $20, made some money off of it, saw the quarter wasn't as bad as it could have been, and then covered."
Short-sellers make money when stocks go down. They borrow shares from a broker, immediately sell them, and then try to pay the broker back with shares they buy at a lower price. The process is known as "covering," and often causes a stock to pop.
Analysts' explanations of webMethods' rise are perfectly acceptable, even if the company's results, on face value, are hardly encouraging. While earnings will miss the mark by a wide margin, revenue will come in at about $55 million, 13.4% lower than the $63.5 million analysts had estimated. The company blames "challenging economic times" and lengthening sales cycles.
But there were positives, including slightly improved margins on software sales, a stable-to-improving cash position, and quicker payments on outstanding sales by its customers.
Still, the mood in investors' minds must have been very dark indeed for shares to pop so strongly over this less-than-stellar news.
webMethods isn't the only company investors have been doubting lately. Ariba, one of Wall Street's favorite punching bags, was widely expected to issue a warning for its second quarter. (After its first quarter, the company warned that revenues would be just half of the $180 million Wall Street was expecting, and laid off a third of its workforce.)
It was a terrible week for many software stocks. Business conditions prodded warnings out of the likes of Commerce One (CMRC:Nasdaq - news - commentary), E.piphany (EPNY:Nasdaq - news - commentary), Art Technology Group (ARTG:Nasdaq - news - commentary), BroadVision (BVSN:Nasdaq - news - commentary) and BMC Software (BMC:NYSE - news - commentary). And analysts are still wary of Ariba's pending results, given that there is no evidence of improvement in business spending.
"We're at a point now, at the end of the first week for the next quarter and no warnings come out. If you look at a silly data point like that, it suggests they pulled things together," says Hilal, who has a market-perform rating on Ariba. "I, for one, thought things were going to be very tough for them to make the quarter. If things are shaping up for them to make the numbers, that would take me off guard, honestly." (Hilal's firm hasn't done underwriting for Ariba.)
But by the end of last week, no warning had come. What's more, Ariba put out a release to schedule its quarterly conference call for July 19, a move many regarded as final confirmation that no warning is pending. Investors bid the stock up Monday on just such an assumption, pushing shares 22% higher to $6.72. Friday, shares closed down 2.5% to $5.82, although overall they were up 5.8% for the week.
(For the record, big software companies PeopleSoft (PSFT:Nasdaq - news - commentary), Siebel Systems (SEBL:Nasdaq - news - commentary), Veritas Software (VRTS:Nasdaq - news - commentary) and SAP (NYSE ADR: - news - commentary) haven't warned, either.)
Ariba: No News Is Good News
Of course, Ariba's numbers are a lot easier to make now than they used to be. According to Thomson Financial First Call, analysts are expecting the company to lose 12 cents per share on revenue of $84 million. Compare that with the end of 2000, when estimates stood at a profit of 7 cents per share on $200 million in revenue for the June quarter.
Even on lowered estimates, Hilal is skeptical of the company's silence. Because the company historically has built up a lot of deferred revenue -- money that it has been paid but hasn't yet recognized on its top line -- it could lean on that money from past periods to make its current quarter look better.
"Companies like that can make the numbers where they don't have to preannounce," Hilal says. "But when you peel back the onion, are you going to see that they sucked it out of deferred revenue? It shouldn't immediately be interpreted that they had a good quarter."
Onions, indeed.
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